In the early 2000s, property values were rising at a rapid rate and bringing with it newfound home equity. As property values rose and mortgage rates dropped, the temptation to refinance and take cash out became irresistible for many. This financial transaction is not so affectionately known as “using your home as an ATM.” It’s officially known as a cash out refinance.
This is not to say that everyone who cashed in on their home equity used the money frivolously. Many used these funds to pay medical bills or education expenses as a last resort. Regardless, refinancing to take out cash can be a very risky proposition.
Real Estate Market – A Brief History
Many real estate professionals consider the summer of 2006 to have been the peak in home prices during that period. This is when the real estate bubble started to burst. When you think about it, it wasn’t so much a burst as it was a slowly deflating balloon. Rather than having prices crash overnight, it took several years for the real estate market to bottom.
What soon followed was a recession so severe that it became known as “The Great Recession” and a near total collapse of our financial system as we know it. This economic period was so bad that it rivals The Great Depression of the 1930s. Some economic and financial experts believe we were only one more bank failure away from a depression even more severe than The Great Depression.
We often think of this period as a real estate bubble where prices were inflated. It many ways, it was. However, it was really more of a debt bubble. We simply took on too much debt. Consumers, investors, bankers, and governments all played a part in the debt bubble and the serious economic impact that followed.
Home Equity – Today
We are now nearly two decades past the beginning of the housing bubble’s collapse. While the scars of the crisis linger, most homeowners have regained solid footing, and many have seen their home equity grow significantly.
If you purchased your home in the last ten to twelve years, there’s a good chance your equity has appreciated dramatically, as property values have risen steadily in most parts of the country. However, the story is more nuanced in 2025, with a shifting landscape of higher interest rates and regional disparities in home value trends.
According to the St. Louis Federal Reserve, median home values nationally have seen significant growth since 2020, when they were approximately $320,000. As of the latest data, those values have surged to around $420,000. If you purchased a $320,000 home in 2020 with a 10% down payment, you could now be sitting on over $100,000 in equity. This equity growth is an asset, but it’s also a temptation.
Interestingly, while Americans hold trillions of dollars in home equity, they have been cautious about leveraging it. According to a recent article from Intercontinental Exchange, homeowners collectively hold over $17.2 trillion in tappable equity. However, many remain reluctant to draw on it. This conservative approach might signal that homeowners are heeding the lessons of the Great Recession.
However, as time distances us from the real estate debacle of the late 2000s, complacency becomes a risk. Banks and lenders are once again ramping up their marketing efforts to encourage homeowners to tap into their home equity.
With interest rates now significantly higher than the lows of the 2010s, tapping into equity may carry more financial risk than it once did. Homeowners should carefully weigh the benefits and risks of leveraging their equity in this new economic environment, ensuring that they proceed with caution and a clear plan for repayment.
Lessons learned
Homes Should Not Be Used As ATMs
Use credit and debt prudently. A home can be a great way to help build wealth over the long term, but only if you can keep your home. If you keep refinancing to take cash out or running up a home equity line of credit, you put yourself at risk.
I know many people who relied on rising home values to fund their lifestyle. Every time they could tap into their home equity they did. The process continued because home values kept rising. As long as they had jobs and could afford the payment, there wasn’t an issue. That is until someone is laid off or the interest rate increases on an adjustable-rate loan.
Too Much Debt Is A BAD thing
There are some people who believe debt is bad. I don’t subscribe to that belief. If you can use credit and debt prudently it can help you increase income and build wealth. What is bad it too much debt. What is too much debt? That number might be different for a lot of people. For me, too much debt is what puts you at risk of losing an asset (your home) due to a reduction in your income or increase in payments.
Home Values CAN Go down:
One of the fallacies that contributed to the housing crash and The Great Recession was that home prices never go down. We all know that nothing could be further from the truth. Don’t assume that recent gains in property values and the corresponding improvements in home equity will continue indefinitely. Think of your home equity as a buffer against potential home value losses in the future.
Be mindful of economic cycles
The real estate market is deeply influenced by broader economic trends, including employment rates, inflation, and monetary policy. Rising interest rates, like those we’re seeing in 2025, can reduce buyer demand and put downward pressure on home prices.
While it’s tempting to assume that your home will always be worth more in the future, economic downturns or shifts in local market conditions can quickly change that equation. Maintaining a conservative approach to borrowing against your home ensures that you’re prepared for unexpected financial challenges.
Diversify your wealth-building strategy
Relying solely on your home as a wealth-building tool can be risky. While homeownership is often touted as a cornerstone of financial stability, it’s important to invest in other assets, such as retirement accounts, stocks, or bonds.
Diversification reduces your exposure to fluctuations in the housing market and ensures you have multiple streams of wealth to draw upon. Remember, your home is both a place to live and an investment, but treating it as your primary financial asset can leave you vulnerable if market conditions shift unfavorably.
Over-correcting
While some may be prone to making the same mistake again, others may be at risk of going too far the other direction. Due to past mistakes and bad experiences with debt, some borrowers get overly ambitious when it comes to paying down their mortgage debt. I recently encountered a person who was considering withdrawing early from their 401k to pay off a loan.
I can appreciate the desire to pay off debt. However, the rush to do so can result in paying significant taxes and not getting as much bang for your buck. This is compounded by the loss of potential future earnings on those funds.
Paying the 10% penalty for early withdrawal from the 401k is on top of ordinary income taxes that would be due. Look at whatever you withdraw from a 401k (assuming all dollars are pre-tax) as regular income. The 10% penalty adds insult to injury.
The worst place to take funds to pay off debt is from tax deferred accounts like 401k and IRA. This is especially the case if you are under 59 ½ due to the penalties involved.
HELOCs in Today’s Environment
The Resurgence of HELOC Offerings
In 2025, banks are increasingly marketing Home Equity Lines of Credit (HELOCs) as a flexible borrowing option for homeowners. These loans allow homeowners to borrow against the equity in their homes, often with lower interest rates compared to personal loans or credit cards.
However, higher overall interest rates mean HELOCs are not as cheap as they once were. Lenders are promoting these products heavily, targeting homeowners with significant equity and good credit scores. Borrowers should carefully evaluate the costs and risks associated with HELOCs, especially given the potential for rising interest rates on variable-rate loans.
Stricter Lending Criteria
While HELOCs are widely available, banks are implementing stricter lending standards to mitigate risks. Borrowers must demonstrate strong creditworthiness, steady income, and sufficient equity to qualify. Loan-to-value (LTV) ratios are closely scrutinized, often capped at 80%, to ensure borrowers retain a safety buffer.
These tighter standards aim to prevent the reckless lending practices that contributed to the last housing crisis. For homeowners, meeting these criteria can mean more stability in the lending market, but it may also limit access to funds for those with marginal qualifications.
Variable-rate Concerns
Many HELOCs feature variable interest rates tied to market indices like the prime rate. With the Federal Reserve maintaining higher rates to combat inflation, HELOC borrowers face greater uncertainty about their future payments.
While initial teaser rates may appear attractive, rate adjustments can significantly increase monthly obligations over time. Homeowners should thoroughly understand the terms of their HELOC agreements, including rate caps and adjustment schedules, to avoid financial surprises.
Alternative Lending Options
As HELOCs become less favorable for some borrowers due to rising rates, alternative lending products are gaining traction. Fixed-rate home equity loans offer more predictable repayment terms, albeit at slightly higher initial interest rates.
Personal loans, cash-out refinancing, and even credit card balance transfers are being explored as potential alternatives. Each option comes with its pros and cons, and homeowners must assess their financial needs and repayment capabilities carefully before committing to a loan.
The Future of HELOCs
The popularity of HELOCs in 2025 reflects a balance between homeowner demand and lender caution. While banks are eager to capitalize on the trillions of dollars in home equity, they are also wary of creating another lending bubble.
For borrowers, this means opportunities to access equity are abundant, but the terms are less forgiving than in the past. Homeowners considering a HELOC should adopt a long-term perspective, borrowing only what they need and ensuring they have a clear repayment strategy in place.
Conclusion
The housing market and lending environment in 2025 provide both opportunities and challenges for homeowners. With property values continuing to rise in many regions, home equity has become a significant asset for millions of Americans.
However, tapping into this equity requires careful consideration and a clear understanding of the risks involved. The lessons from the Great Recession remain relevant today: avoid overleveraging, prepare for economic uncertainties, and treat your home as a long-term investment rather than a quick source of cash.
As banks and lenders renew their focus on HELOCs and other equity-based products, borrowers must navigate a more cautious lending landscape. Stricter criteria and higher interest rates reflect a shift toward stability, but they also underscore the importance of financial planning.
Homeowners should explore all options, from fixed-rate loans to diversified investment strategies, to build wealth responsibly and sustainably.
Ultimately, the key to thriving in today’s real estate market is balance. By leveraging equity wisely, diversifying investments, and staying informed about economic trends, homeowners can safeguard their financial future while making the most of their hard-earned assets. The housing market will always have its ups and downs, but a prudent approach can help mitigate risks and maximize rewards.
Have you considered how a Certified Financial Planner® can help you?
Schedule a call with me via this link!
Image courtesy of FreeDigitalPhotos.net
Citations:
Median Sales Price of Homes Sold Nationally 2005 – 2010
U.S. Census Bureau and U.S. Department of Housing and Urban Development, Median Sales Price of Houses Sold for the United States [MSPUS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MSPUS, January 15, 2025.
Median Sales Price of Homes Sold Nationally 2020 – 2025
U.S. Census Bureau and U.S. Department of Housing and Urban Development, Median Sales Price of Houses Sold for the United States [MSPUS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MSPUS, January 15, 2025.
Home Equity Loans 2008 – 2025
Board of Governors of the Federal Reserve System (US), All Sectors; Home Equity Loans; Asset, Level [BOGZ1FL893065125Q], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/BOGZ1FL893065125Q, January 15, 2025.
